education planning – Retirement Income Center

Last week, in Retirement Planning Risks, I discussed six risks associated with retirement planning in general. In order to understand and appreciate the value and importance of retirement income planning and its associated strategies, let’s take a closer look at retirement asset planning.

As was presented in The Retirement Planning Paradigm Shift – Part 2, the focus of retirement asset planning is on the accumulation and “spending down” of one’s assets. The accumulation phase is common to various financial planning areas, not just retirement, including house purchase planning and education planning, to name a couple. With most types of planning, you’re typically designing a plan for the purpose of accumulating funds for either (1) a single expenditure at some specified, or target, date, in the future, e.g., a down payment on a house, or (2) a series of expenditures for a limited and specified series of target dates, e.g., a four-year college education.

With all types of financial planning, there are two major stages: (1) design, and (2) funding, or plan implementation. Similar to an architect, a financial planner, after consultation with his/her client(s), designs a financial blueprint, or plan, for achieving a particular goal, or series of goals. Assuming that the client approves the recommendations, the plan is generally funded with a single lump sum or a series of payments over a specified period of time, depending on the plan’s goals, the client’s current and projected resources, and various other factors.

With most types of financial planning, when you reach the plan’s target date, you immediately, or over a limited number of years, e.g., four in the case of college education, see the results of your plan. What distinguishes retirement asset planning from other types of planning and adds to the complexity of the plan design and funding strategy is the “spend-down” phase.

Unique to retirement asset planning, the timeframe of the “spend-down” phase is undefined. It can last for less than a year and, although it is unlikely, it can go on for as many as 60 years, depending upon when it starts and a host of many variables.

Unlike most types of financial planning where you get to see the results of your plan after reaching a specified target date, this is not the case with retirement asset planning. As a result of all of the risks discussed in last week’s post, there’s an inherent uncertainty associated with retirement asset planning. Even if you’ve done an excellent job of accumulating what appear to be sufficient assets for retirement, you generally won’t know if this is true for many years.

While retirement asset planning can provide a solid foundation for a successful retirement plan, unless it is accompanied by a customized retirement income plan at the appropriate stage in your life, there is a higher likelihood that your retirement income will fall short of your needs and that the plan, itself, may not succeed.

My clients and those of you who have visited my firm, Financial Design Center’s website are familiar with the firm’s mission statement that is prominently displayed on the bottom of each page of the website: Planning, Managing, and Protecting Your Financial Independence™. In addition to emphasizing our comprehensive approach to the financial planning process, i.e., planning, managing, and protecting, it clearly states the endgame – financial independence. This is our raison d’etre and is the focus of everything that we do for our clients.

You may be wondering, “What’s the difference between financial independence planning and retirement income planning and why are you writing a blog about the latter instead of the former?” For those of you who are actually thinking this, great question!

In order to answer this question, you first need to understand the difference between traditional financial planning and financial independence planning. Traditional financial plans are often designed for achieving one or more financial goals that may include buying a home, paying for college, and accumulating sufficient funds for retirement. Since retirement is the last goal chronologically, it is typically “backed into” using whatever resources haven’t been consumed by other goals. Consequently, traditional comprehensive planning may require you to delay your retirement and/or compromise your retirement lifestyle.

Financial independence planning works from the premise that your ultimate goal is the achievement of financial independence. Your financial resources are directed toward this goal through the development and management of a plan designed to provide an ongoing, inflation-protected, tax-favored distribution of income that will ideally enable you to live in the style to which you’re accustomed, while minimizing the possibility that you will outlive your assets.

You may be thinking, “Well, isn’t this financial independence planning stuff really retirement income planning?” Wow, you guys are good! While they are undoubtedly intertwined, financial independence income planning, or retirement income planning, as it is more commonly known and will be referred to from hereon out, is actually a separate and distinct component of the comprehensive financial independence planning process.

While, as previously stated, the ultimate goal of financial independence planning is the achievement of financial independence, it’s a comprehensive process that also includes planning strategies for achieving traditional financial planning goals, including, but not limited to, education, income tax, risk management (i.e., insurance), investment, and estate planning. Like various financial planning goals, the timing of the commencement of retirement income planning is generally specific to one’s stage in life.

Although I employ the financial independence planning process, which includes retirement asset planning, with all of my pre-retiree clients, in order to maximize its effectiveness, I generally begin to engage my clients in thinking about, and acting upon, retirement income planning strategies when they are 20 years from their projected retirement or financial independence planning dates.